Macroeconomic exposure of developing economies to low-carbon transition

Abstract

The low-carbon transition is a specific type of rapid structural change where low-emission industries grow and high-emission industries decline due to deliberate policies, changing preferences and technological change. Developing countries’ macroeconomic exposure to this transition depends upon their reliance on carbon-intensive industries as a source of foreign currency, fiscal revenue, employment and wage income. Identifying these different dimensions of countries’ exposure is important because different green policies need to be applied in different contexts, and the results of these policies will be more or less effective according to countries’ idiosyncrasies.This paper aims at providing estimates of countries’ macroeconomic current exposures to the low-carbon transition. We develop a method to evaluate countries’ external, fiscal and socioeconomic exposure, and, considering their capacity to adapt their productive structure, we analyse countries’ vulnerabilities and risks in these different dimensions. Using a Hybrid World Input-output table for 189 countries, we identify the carbon-intensive industries, and then we estimate each country’s direct and indirect dependence on these industries, considering countries’ dependence for raising of foreign currency to analyse the external exposure, government revenue to evaluate the fiscal exposure, and the share of wages and employment to analyse the socioeconomic exposure.Results show that countries present different degrees of exposure in different dimensions, and the degree of exposure varies significantly when indirect impacts are considered. Moreover, by analysing countries’ capacity to adapt their production structure and resilience factors, we evaluate to what extent countries’ macroeconomic exposure imply a higher vulnerability to the green transition process.